APPOINTMENT OF DIRECTORS

There are several types of directors in companies and there are several types of companies and then there are certain mandatory rules for companies to appoint certain kind of directors in certain companies. Confused? Probably, yes. This article provides a brief to the various classes of directors and their appointment. According to Section 2(34) of Companies Act, 2013 a director is a person who is appointed as director in the company. A person who is appointed but not designated as a director will not be considered as a director under the meaning of this Act. Only an individual shall be eligible to be appointed as director because in case of corporates and firms it will be difficult to fix duties and responsibilities. Minor cannot be a director because of the ineligibility to obtain DIN (Section 152(3)). As per Section 149(3), atleast one director has to be an Indian resident.

Minimum number of directors: In case of public company it is 3, private company 2 and one person company 1. Though articles of the company might specify for a higher number of minimality.

Maximum number of directors– It is 15 but more can be appointed by passing a special resolution. Requirement of special resolution is not needed in government company and company licenced under section 8 subject to condition.

No person shall hold directorship in more than 20 companies and 10 in case of public company as per section 165 of the Companies Act. For counting the limit, dormant company and company licenced under section 8 subject to condition are excluded.

Suppose a person is director in 15 companies out of which 9 are public and 6 are private. Now he is eligible to be appointed as director in only 1 more public and/or 4 private companies if no public company then 5 in private company. For the purpose of this section any holding/subsidiary of any public company will be considered  as public company.

Disqualification of director (Section 164)- Following are not eligible to be a director-

1. A person of unsound mind

2. Undischarged insolvent

3. Person applied for to be adjudicated as an insolvent and his application is pending.

4. A person who has been imprisoned for more than 6 months and 5 years have not elapsed.

5. Court or Tribunal disqualifying such person

6. A person who has not paid any call on share and 6 months have elapsed.

7. Convicted in offence of related party transaction in preceding 5 years.

8. A person who has not been allotted with DIN.

Any company in which such candidate is director and such company has not filed annual return for consecutive period of 3 years or defaulted in payment/redemption of deposits/ debentures or its interest or defaulted in payment of declared dividend is also not eligible for reappointment in the same company and appointment in any other company for a period of 5 years.

Executive Director– A director who is employed in the company and closely witness daily affairs of the company are known as executive directors. They possess deep knowledge of the company. This class includes managing directors and whole time directors also.

Non- Executive directors– Directors who are neither employed nor are they closely involved in the day to day management of the company are known as non-executive directors. This class majorly includes professional directors, nominee directors etc who have unbiased attitude towards the company.

Rotational Directors– In case of companies other than private company and certain government company, not less than two third of the directors shall retire by rotation. Articles may specify retirement of all the directors by rotation. Not less than one third of rotational directors are liable to retire either by lots or agreement. Retiring director may be reappointed but not in cases specified in section 152(7)(b). Retiring director cannot hold office beyond the last date of AGM.

While counting the total number, independent directors are not included and nominee director appointed by financial institution are also not included.

Non-rotational directors– Directors other than rotational are non rotational directors.

First director– Directors specified in the articles at the time of incorporation. If not specified then shall be selected by majority of memorandum subscribers as per Table F and if Table F is not applicable then all the subscribers are first directors. They are appointed till the company appoints subsequent directors.

Manager/ Managing Director/ Whole time directors

As per section 203, every listed company or any public company having paid up share capital of more than 10 crores or a company not falling under above two but having paid up share capital of more than 5 crores is required to appoint managing director/manager/whole time director, company secretary and chief executive officer.

A person who fits in the definition provided in the section 2(54) of the Act is known as managing director of the company. Similarly Manager is defined under section 2(53) and whole time director in section 2(94). No such person can be appointed for a period of more than 5 years although such restriction is not applicable on private company. Section 196 provides with the appointment of such key managerial persons. Such person must be resident of India, aged between 21 to 70 years (subject to condition for above 70 years) and all other eligibilty criteria as per schedule V.

Independent directors– As the name suggests such directors are not related in certain ways with the company. They are not Managing directors, whole time directors or nominee directors, such directors have to comply with the criterias given in section 149(6). An independent director can be appointed for a consecutive period of not more than 2 years then a gap of 3 years is required before their reappointment in the same company for the same position.

Every listed public company shall have not less than one third of its directors as independent. Following prescribed public companies shall have minimum of 2 independent directors:-

1. whose paid up share capital is of 10 crores or more

2 whose turnover is of 100 crores or more

3. whose outstanding loans, debentures, and deposits in aggregate exceeds 50 crores.

A joint venture, wholly owned subsidiaries and dormant companies need not to have such directors. If a company has audit committee then more than half shall be independent directors and this will be the minimum number of independent directors in such companies.

For example, if a public company has paid up share capital of Rs. 12 crores and has 7 members in audit committee then minimum number shall not be 2 but 4 i.e. more than half of 7.

Nominee director– Such directors are appointed by third party subject to the articles of the company in pursuance with the law or any provisions for the time being in force. For example a director appointed by bank.

Woman director– Following companies must have atleast one director as woman-

1. Every listed company and

2. Every public company having paid up share of 100 crores or more

3. Every public company having turnover of 300 crores or more.

Vacancy shall be filled by 3 months from such vacancy or immediate next board meeting after such vacancy whichever is later.

Additional director– All public or private companies can appoint additional director but the articles should allow for the same and such person shall not fail to be appointed as director in general meeting. Such director can be appointed in board meeting or passing resolution by circulation. Such director cannot hold office beyond the next AGM or the due date on which such AGM is ought to be conducted.

For example, a company did not organise AGM till 30th September but the additional director in any case cannot hold office beyond 30th September. In case company acquires permission from prescribed authority to hold AGM at a later date then that date shall be the last date for additional director which should not be any date later than 31st December.

Alternate director– When a director is leaving India for a period of 3 months then Board may appoint an alternate director (who is not director in the same company nor holding alternate directorship for anyone else in the same company) by articles or passing special resolution. He/she shall have same position as of original director. He shall hold the post till the director in place of whom he is appointed returns back or the period of holding office of the original director comes to an end.

Directors by small shareholders– Only listed companies whose shareholders having nominal value of less than 20000 proposes to appoint a small shareholder’s director have to give notice atleast 14 days before the meeting.  1000 small shareholders or 10% of total number of shareholders  whichever is lower is required to give such notice. Such a director shall not be appointed for a period of more than 3 consecutive years then a cooling period of 3 years before such appointment in the same company. A person can hold such  directorship in two companies  maximum second one not being the competitor of the first one. Grounds of disqualifications, vacation of office, independent director are as it is applicable on such directors as well.

Casual vacancy– Such vacancy can be filled by board if the director vacating the position was appointed in general meeting. Although there is no obligation to fill such vacancy. Term of such director shall not exceed the term of director for whom such vacancy was filled.

Proportional representation– Except for the government companies, to avoid the situation of dominance of majority voting hands over the minor ones a company can appoint not less than 2/3rd of directors by proportional representation so that minority shareholders are not deprived off  their powers and rights in the company.

Every person has right to showcase his ability to stand in the position of director in the public company. As per section 160 of the Act, any person can give his signed candidature at the registered office of the company atleast 14 days prior to the meeting with a deposit of Rs. 1 lakhs  (Rs. 10000 in case of Nidhi company). Such amount is refunded if the person acquires such position or he gets atleast 25% of votes in favour.

General points:

Director cannot assign his office even though articles provide.

Any director wishing to attend board meeting through video conferencing has to inform the company of his intentions in the beginning of the year.

Sitting fees for all the directors irrespective of gender or position shall be decided indicriminantly which shall not exceed Rs.1 lakh per meeting.

As per section 162 a separate resolution at  general meeting has to be passed  for appointment for every director. No single resolution can be passed for appointment of more than 1 director unless a resolution has been passed with all votes casted in favour of passing a single resolution subject to other conditions specified in section 162.

Notice of any meeting shall be given to every director whether he is in abroad, has informed about his absence or any reason.

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7 Comments

  1. Mahima says:

    In case of managing director where is it mentioned that “No such person can be appointed for a period of more than 5 years although such restriction is not applicable on private company.”

    Plz confirm about private companies.

  2. Rahul Rustagi says:

    Where it has been written that nominee directors shall be excluded from the count of total directors as regard to section 152(6)?

  3. Nikhil Patil says:

    Can you tell me where in Act/ Rules it is stated that Sec 8 companies & Govt. Companies need not pass a SR for appointment of more than 15 Directors ?

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